Thames Water could find its plan to hike water bills by £29 per household thwarted after Ofwat said it was investigating whether the one-off price rise was justified.

The water regulator attacked Thames Water’s record and its demand for more money, which the utility firm says is necessary pay for a 'super sewer' under London.

It accused the utility firm of benefitting from ultra-low borrowing costs for big corporations, adding it had made ‘substantial savings’ by doing less than expected to tackle sewer flooding.

Sewage works: Thames Water has been criticised by Ofwat for failing to fix flooding sewers and broker water pipes among a number of failings

Thames Water wants permission for a
one-off bill increase of up to 8 per cent in 2014/15 because it says
more customers are struggling to pay their bills and because it must
find the funds to build a super sewer under the capital.

It claims £16 of the proposed £29 hike is accounted for by increases in bad debt as a result of customers failing to pay
their bills, which it blames on the economic downturn.

But last month Downing Street issued a sharp rebuke to the idea, warning utility firms must 'take account' of the big squeeze being faced by families before hiking bills amid fears other companies could follow suit.

The current average Thames Water household bill is around £354 a year.

Thames hopes to apply the price rise to next
year, but has asked if it can spread out the charge over more than one
year to avoid a spike in bills.

Ofwat also criticised Thames Water for a major investment programme in sewage treatment which it said had dragged on too long despite customers being charged for the improvement.

And it said some of Thames Water's sewerage network is not hitting performance targets.Ofwat chief regulation officer Sonia Brown said: ‘We have been clear that we would challenge Thames' proposed bill increase. So we are looking to see if there are areas where we can claim money back for customers.’

Ofwat also launched a separate probe into whether the company has ‘benefited from wider economic circumstances beyond its control’.

The probe is believed to centre on whether Thames Water has gained from the ultra-low interest rate environment, reducing the cost of servicing its huge debt pile.

It could deduct gains from Thames Water through a process called the ‘favourable effect mechanism’ - although Ofwat said it is too soon to say whether this may result in lower bills for the utility’s 14 million customers.

Thames Water sparked anger when it revealed the planned bill increase last month. It came just months after it emerged that the firm, whose revenues rose to £1.8billion in the last financial year, paid no corporation tax.

The company, which is owned by private equity, also paid out £231million in dividends last year.

His basic pay rose £25,000 to £450,000 and he also received a bonus of £274,000.

Ofwat has already warned that households can expect an average price rise of 3.5 per cent this year, with a typical annual bill of £388. But some households pay much more.

Stuart Siddall, Thames' chief financial officer, said: ‘Ofwat resets price limits for each water company every five years, most recently in 2009, based on the best information available at the time.

Thames Water is subject to a five-year price control period that runs out in 2015 but said it needs to ask customers for more to cover costs that could not be quantified at the time this was set in 2009.

It cited £273million spent acquiring land for the Thames Tideway Tunnel, a major new sewer development.

A Thames Water spokesman said: ‘We expected the regulator to set out the format for assessing our application. This is part of the regulatory process. We don't plan to comment until after Ofwat's draft decision, expected in mid-October.’

Underlying pre-tax profits at Thames Water fell 20 per cent to £144.9million in the year to the end of March.

Thames Water is owned by Kemble Water Holdings, whose main investors are ultimately controlled by Macquarie.

Much of Thames Water's income was spent on servicing huge debts, with interest payments of over £400million over the year as borrowings increased from £7.8billion to £8.4billion.